$1.4B SETTLEMENT SEEKS TO CHANGE WALL STREET'S WAYS

Apr 28, 2003 | New York Post

A $1.4 billion global research settlement expected to be released today will change the way Wall Street does business.

The result of months of haggling between a dozen banks and state and federal regulators including the Securities and Exchange Commission, the NASD, the New York Attorney General's office and a handful of state securities regulators the agreement represents the largest overall fine in Wall Street history.

Its terms will alter practices once considered standard and necessary in the hyper-competitive world of investment banking.

The SEC is expected to approve the global research settlement, as well as 10 separate agreements with the various firms, early today. At the same time, the pieces of the agreement will be entered into Federal District Court in Manhattan meaning that if any bank shows willful disregard of any part of the agreement, a federal district judge can impose fines on that firm.

It is expected that Merrill Lynch, Credit Suisse First Boston and Citibank will be alleged to have committed fraud.

Other firms will be charged with lesser violations of state and federal securities law such as failure to disclose material conflicts of interest.

The settlement, say people who've seen the documents, will call for the separation of research and banking, prohibiting research analysts from participating in road shows or pitches.

Investment banking groups will be precluded from determining analyst compensation - a practice that became commonplace during the bull market, when positive research became banks' most effective weapon in winning lucrative IPOs.

Banks will also be required to improve the transparency of their ratings. Each of the 10 firms will have to publish, within 90 days of the end of every quarter, every analyst's rating on every stock. They will not have to publish the research itself, but online access to ratings will allow investors to compare ratings among firms.

The banks will also have to provide two to three independent research opinions in conjunction with any research they give to an investor. The selection of that research will be overseen by an independent, part-time consultant who must be approved by the SEC.

The New York Attorney General's office declined to comment. The SEC could not be reached for comment.

In what is one of the most dramatic elements of the agreement, the global settlement will ban banks from awarding hot IPO shares to the officers and directors of public companies - a practice called "spinning." Sources say this was a contentious point among regulators because some saw it as criminalizing CEOs, while others saw the practice as a bribe to convince a CEO to do business with a bank.

Finally, every firm will have a monitor who reports to regulators on the bank's compliance with the terms of the global settlement. Those monitors will be announced today.

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